Should I set up a family trust?

A family trust is generally a discretionary trust established by deed to hold and manage assets for a defined group of beneficiaries. The trustee controls the trust property and decides how income or capital is distributed, within the powers and rules set out in the deed.

Each financial year, the trust calculates its income, and the trustee determines which beneficiaries will receive distributions. Those beneficiaries generally include their share of the trust income in their own assessable income. The trust must also prepare financial statements, lodge a trust tax return and meet any applicable registration requirements.

Types of family trusts in Australia

The term family trust commonly refers to a discretionary trust created to benefit members of a family group. Under this structure, beneficiaries do not usually have a fixed entitlement to trust income or assets. Instead, the trustee determines who receives a distribution and how much they receive each year.

Other trust structures may be relevant in different circumstances:

‍

Most family trust setups use a discretionary structure because it provides flexibility over distributions. However, the appropriate type depends on the trust’s purpose, the assets it will hold and who is intended to benefit.

The trust deed, trustee and beneficiaries

The trust deed is the legal document that establishes the trust and governs how it must operate. It defines the beneficiary classes, the trustee’s powers, the rules for distributing income and capital, and what happens when the trust reaches its vesting date.

The principal parties are:

• Trustee: Holds legal control of the trust assets, makes distribution decisions and manages the trust in accordance with the deed.
• Beneficiaries: The people or entities eligible to receive trust income or capital.
• Appointor: Typically has the authority to appoint or remove the trustee.
• Settlor: Establishes the trust by providing an initial settlement amount.

The trustee may be one or more individuals or a company. Regardless of the trustee structure, decisions must comply with the deed and be properly recorded.

A family trust could provide greater flexibility over how business or investment income is managed, help separate certain assets from personal ownership and support long-term succession planning. However, setting up the trust is only worthwhile when there is a clear purpose and the expected advantages outweigh the legal, taxation and administration costs.

Before you start, consider how the trust will be used, who may benefit from the trust and whether another structure could achieve the same goals more simply. Professional advice is important because the outcome depends on the trust deed, the assets involved and the trustee’s ongoing management.

When a family trust may suit you

A family trust may suit an Australian business owner, investor or family that wants more flexibility in managing income, investments and future ownership. It may be worth considering when:

• Business profits or investment income are increasing
• You want to separate selected assets from personal ownership
• Several adult family members may benefit from the trust
• You are planning how wealth or a family business could transfer to the next generation
• You intend to hold shares, a business, an investment property or other long-term assets
• You are moving from a sole trader structure and need a more structured approach to growth.

Whether a family trust is a good fit depends on more than its potential tax advantages. You should also consider whether people may join or leave the business, whether you expect a future sale and capital gain, and whether the structure could affect access to grants or concessions.

Tax planning and income distribution

A family trust is a type of discretionary trust, so the trustee may generally decide how eligible income and capital gains are distributed among beneficiaries each financial year, subject to the trust deed and Australian taxation law.

This flexibility may allow income to be directed to adult beneficiaries whose circumstances and marginal tax rates make the distribution more tax-effective. The beneficiary then includes the distribution in their own tax return and may need to pay tax at their applicable rate. This does not mean the trust automatically delivers tax minimisation. Distributions must be valid, commercially appropriate and compliant with ATO rules.

The trust may also be able to distribute franked dividends and capital gains. Where an eligible investment asset has been held for more than 12 months, the trust may have access to the 50% CGT discount before the gain is distributed. The precise tax implications depend on the asset, beneficiary, and trust deed. 

Important: Putting income through a family trust does not remove the responsibility to pay tax. Undistributed income, distributions to minors and arrangements involving non-residents can attract less favourable tax treatment.

Asset protection and succession planning

Holding a business, shares or an investment property through a trust may help separate those assets from assets owned in an individual’s personal name. This can provide a level of protection for a beneficiary experiencing financial or legal difficulties, although the outcome depends on how the trust is structured, controlled, and maintained. It should not be treated as absolute protection.

A trust can also support succession planning by allowing the trustee's control to change without requiring all underlying assets to be transferred at the same time. The trust deed can guide who controls the structure and who may benefit from its income or capital in the future.

This may be useful for:

• maintaining a family investment portfolio across generations
• planning the future management of a business or farm
• providing for adult children or other eligible beneficiaries
• reducing the need to sell certain assets when control changes
• coordinating the trust with a will, superannuation and broader estate planning.

Buying or transferring a family home into a trust requires particular care. It may create land tax, stamp duty or CGT implications and could affect access to the main residence exemption. These issues are explored later in the property section.

Disadvantages and when another structure may be more suitable

The flexibility of a family trust comes with ongoing responsibility. The trustee must maintain accurate records, prepare annual financial statements, document distributions, lodge the required tax return and keep the trust’s bank account and assets separate from personal funds. A corporate trustee can add ASIC and company administration costs.

Other potential disadvantages include:

• Trust losses generally remain in the trust rather than transferring to beneficiaries
• Income left undistributed may be taxed at the top marginal rate
• Distributions to minors can attract higher tax rates
• Family disputes may complicate management and decision-making
• Certain grants or concessions may not be available
• Borrowing and purchasing property may be more complex
• The trust must eventually vest under the rules in its deed
• Transferring an existing house, investment or business asset into the trust may trigger tax or duty.

An individual, company, partnership, or SMSF may be more suitable, depending on what you intend to own, how you plan to fund a purchase, and whether the structure is for business, investment, retirement, or personal living purposes. An independent adviser can explain the pros and cons and assess whether a family trust fits your wider financial plan.

Planning ahead for the proposed changes? 

The exposure draft also includes expanded rollover relief for eligible taxpayers who restructure out of a discretionary trust, as well as an option for some trusts to elect to make fixed distributions to pre-nominated beneficiaries. These measures are still proposed and should be reviewed once the legislation is finalised.

A family trust generally does not pay tax when its income is distributed correctly. Instead, beneficiaries include their share of trust income in their tax returns and pay tax at their applicable rates. The trustee must make and document distribution decisions in line with the trust deed and ATO rules.

Family trust tax rates and annual distributions

How trust income is taxed depends on who receives it:

‍

The trustee usually prepares a distribution resolution before the end of the financial year. If no beneficiary is presently entitled to the income, the trustee may become liable for the tax.

Under the exposure draft legislation, discretionary trusts would be subject to a 30% minimum tax at the trustee level from 1 July 2028. Non-corporate beneficiaries may receive a non-refundable credit for tax paid by the trustee, while corporate beneficiaries would not receive that credit. This could significantly reduce the tax effectiveness of traditional bucket company strategies. The proposal is not yet law and may change before commencement.

Capital gains and franked distributions

When the trust sells property, shares, or another asset, a capital gain may be distributed to beneficiaries where permitted by the trust deed. An eligible asset held for more than 12 months may qualify for the 50% CGT discount before the net gain is distributed.

Franked dividends and their attached franking credits may also flow through to eligible beneficiaries. The trust deed must support the distribution, and ATO requirements must be met.

Trust losses, minor and non-resident beneficiaries

Trust losses generally remain in the trust and may be carried forward to offset future income, subject to the trust loss rules. They cannot usually be distributed to beneficiaries.

Distributions to minors are commonly taxed at penalty rates, while payments to non-residents may create withholding and reporting obligations. Additional tax may also apply to certain distributions made outside the defined family group.

Tax returns and compliance requirements

A family trust that earns income generally needs to lodge an annual trust tax return. The trustee is responsible for maintaining records of:

• income, expenses and capital gains
• beneficiary distributions
• distribution resolutions
• franked dividends and credits
• trust assets and transactions.

Accurate records help ensure the trust’s tax return and each beneficiary’s reporting remain consistent.

A corporate trustee is a company appointed to manage the trust, while an individual trustee is one or more people acting in that role. The main differences involve personal liability, succession, cost and administration.

‍

Benefits and limitations of a corporate trustee

A corporate trustee can provide continuity because the company remains in place even if its directors or shareholders change. It can also create a clearer separation between trust assets and personal assets, which may support asset protection and succession planning.

The disadvantages are higher setup costs, annual ASIC fees and additional company administration. Directors must also meet their obligations under both the trust deed and Australian corporations law.

Benefits and limitations of an individual trustee

An individual trustee is generally cheaper and simpler to establish and maintain. It may suit a small, low-risk family trust with limited assets and straightforward succession needs.

However, the trustee may be personally liable for trust debts. Changing trustees can also require ownership records for property, investments and other trust assets to be updated, which may add cost and complexity.

Choosing the right trustee structure

A corporate trustee may be more suitable where the trust will hold significant assets, operate over the long term or require a clear succession plan. An individual trustee may suit a simpler trust where keeping costs low is the main priority.

The choice should reflect:

• the assets and activities of the trust
• exposure to business or investment risk
• long-term control and succession plans
• setup and ongoing administration costs
• whether personal and trust assets need clearer separation.

Neither option removes the trustee’s responsibility to follow the deed, maintain accurate records and act in the beneficiaries’ interests.

The cost of a family trust depends on the trust deed, trustee structure and level of professional advice required. In Australia, setup typically starts at around $1,500 plus GST, with higher costs when a corporate trustee is established.

Initial setup and corporate trustee costs

‍

A corporate trustee costs more to establish because a separate company must be registered and maintained. More complex assets, beneficiary arrangements or legal advice can also increase the upfront cost.

Ongoing accounting, ASIC and administration costs

A family trust may also have annual expenses for:

• accounting and financial statements
• preparation of the trust tax return
• distribution resolutions and record-keeping
• ASIC fees are waived when a corporate trustee uses
• Legal or advisory support when circumstances change.

Accounting and tax costs may range from $1,000 to $2,000 or more each year, while administration costs vary with the trust’s activity and complexity.

Buying property through a family trust can support flexible income distribution, asset protection and estate planning. However, trusts may face higher land taxes, limited access to certain exemptions, and additional accounting costs. Review the structure before signing a contract, as transferring property later may trigger duty or CGT

Benefits of owning property in a trust

A trust can distribute rental income among eligible adult beneficiaries, subject to the terms of the deed and applicable tax rules. It may also separate the property from personal ownership, making it easier to pass control of a family investment portfolio to the next generation.

These benefits are not automatic. They depend on how the trust is controlled, who the beneficiaries are and whether the property is intended as an investment or a family home.

Land tax and stamp duty

Land tax rules vary between states and territories, and trusts may be assessed at different thresholds or surcharge rates. In Victoria, most trust-held land is subject to trust surcharge rates once its taxable value reaches $25,000, although exemptions and beneficiary nominations may apply.

Stamp duty may also arise when property is purchased, transferred into the trust or affected by certain changes to the trust deed or beneficiary arrangements. The implications should be checked before completing the purchase or amending the trust.

Trust losses and capital gains tax

If a negatively geared property creates a tax loss, that loss generally remains in the trust. It is usually not distributable to beneficiaries, although it may be carried forward and applied against future trust income if the relevant rules are met.

When the trust sells the property, any capital gain may be distributed to beneficiaries. An eligible trust may access the 50% CGT discount where the property has been held for more than 12 months, but tax can still be payable on the discounted gain.

Other additional costs

Property held in a trust may involve:

• annual accounting and trust tax return fees
• corporate trustee and ASIC costs
• legal fees for deed changes or refinancing
• lender fees or less flexible borrowing options
• property management, insurance and valuation costs
• state-based land tax or surcharge obligations.

The right ownership structure should be confirmed before purchase. The Victorian State Revenue Office provides current guidance on how trusts are assessed for land tax, including surcharge rates and notification requirements.

A vesting date is when a trust’s discretionary period ends and the beneficiaries’ interests become fixed. The trustee can no longer decide freely how income or capital is distributed and must follow the vesting terms in the trust deed. 

When does a trust vest?

A trust vests on the date stated in its deed. This may be:

• a fixed calendar date
• a set number of years after establishment
• an event such as the death of a nominated person
• the maximum period allowed under the relevant state or territory law.

Many Australian trusts use an 80-year vesting period, although the deed or local law may set a different timeframe.

Legal and tax implications of vesting

When a trust vests:

• Beneficiaries may become absolutely entitled to trust assets
• The trustee’s discretionary powers end
• Income and capital must be managed according to fixed entitlements
• CGT may apply, including CGT event E5
• Poorly handled deed changes may create resettlement risks.

Vesting does not always mean the trust assets are immediately sold or transferred. The outcome depends on the deed and the rights created for each beneficiary.

How to prepare for a trust’s vesting date

Trustees should review the deed well before vesting to confirm:

• The exact date and whether it can be changed
• Which beneficiaries will receive fixed interests
• Any distributions required beforehand
• The potential CGT and income tax implications
• How asset ownership and control will be recorded.

All decisions should be documented, and legal and tax advice should be obtained before changing the deed or transferring assets.